With overall required contribution rates increasing at an alarming rate, most CalPERS employers – particularly those with significant “classic” safety populations – are looking for help to pay for these obligations.
We continue to see tremendous interest about the CalPERS “cost-sharing” process. Here are a couple of thoughts about cost-sharing that would be important to know:
Beginning in 2019, there is greater flexibility for employers who have adopted the Amendment Method to “update” the employees’ cost-sharing percentage, or to have the employees’ cost-sharing automatically change based on an agreed-upon methodology. New legislation allows the parties to implement certain changes with CalPERS without a formal contract amendment.
In many cases, cost-sharing under this method contemplates that the employees’ gross paychecks will reflect a deduction to be applied to the cost-sharing obligation. There is a difference of opinion as to the tax treatment of this deduction. This is because the pick-up rules apply only to normal member contributions. However, cost-sharing contributions through the MOU Method, unlike those under the Amendment Method, are not converted into normal members contributions. Numerous cities have adopted the MOU Method of cost-sharing and have taken the position that the amounts being cost-shared by employees (that is, the deductions) are pre-tax. However, there are a number of California cities and their advisers, including this author, who believe that the employees’ cost-sharing payment must be considered as after-tax.
Given the differing views with respect to the tax treatment of cost-sharing under the MOU Method, employers who contemplate this approach should consult with knowledgeable employee benefits counsel, and may wish to obtain a private letter ruling before they treat 20516(f) cost-sharing amounts as pre-tax.